Sell unit to buy a house

I have an apartment in the inner west of Sydney (investment property), and am weighing up the option of selling it to buy a house (with land content-front and back yard). Preferably something that has potential for capital improvement via renovation or development.

My motivation:

-Capital growth of houses in the area has outstripped that of apartments. (I’ve calculated the apartment’s annual compound capital growth since 2003 and it’s 9.0% pa. Capital growth of an average house in the area has been 13.5%. To put this in perspective, a $300K apartment in 2003 is now worth $650K whereas, a $600K house is now worth over $1.65M

-A lot of units are getting built in the area - though many are probably of lower quality and higher strata costs (I'm only paying $520 pq).

Question: I want to build a property portfolio. Should I sell the apartment and buy a house worth $1.3M or should I keep the apartment and buy another investment worth $650K?

Question: I want to build a property portfolio. Should I sell the apartment and buy a house worth $1.3M or should I keep the apartment and buy another investment worth $650K?

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Like Nick said, it is best to access the equity and use that money as a deposit for new properties. The difficulty would be to decide where to buy because atm Sydney property is overpriced and could potentially fall.

I think your apartment has done its job. It's had good capital growth and created some decent equity for you.
You need to ask yourself, do you continue to hold the apartment, in a market now where more apartments are getting built, thus possibly creating an oversupply issue which will impact rental and capital growth?
Do you think there is more growth left in this apartment? Or are you better off selling, paying you CGT and redeploying your finances elsewhere for a better return?

Some have said access the equity, that's an option. But your risk would be holding an asset with stunted or negative growth (reasons listed about) and it would have a decent negative impact on your servicabitly and borrowing capacity. That's a liability you can do without, especially if you're planning on developing.

If one name you could sell 50% to a spouse without duty. Gear up and then buy the new PPOR and claim the interest interest on the spouse's loan which was used to pay you out. (assuming NSW). Perhaps no CGT if always your main residence and never income producing.

I think you first need to consider the cost of making a switch, such as selling costs, taxes, buying costs etc. You may have significant upfront costs by doing this.

So generally it would be a financial disadvantage to sell and buy a house, unless you can guarantee that capital gains will be significant enough to outweigh the initial and ongoing costs.

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Thanks for the great reply Nick

I've considered these costs. Stamp duty in NSW for a $650K property is approximately $25K. This will be incurred when reinvesting the proceeds of sale. Sale costs, estimate $15K. CGT: it’s a principal residence but I did have it rented out at one stage.

Yes, I agree, it may be costing me to hold the unit. Whether “capital gains will be significant enough to outweigh the initial and ongoing costs”; I haven’t done the numbers but going by what’s transpired in the last 13 years I’m inclined to think they do

Buy one property in each state. In two years, use the equity and rest of the balance to buy another in Sydney.

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I like the idea a buying in different states. I assume you get a tax free threshhold for land tax in each. If you have 5 properties in Sydney you'd probably be up for a hefty land tax bill every February

Well, you mentioned it was an investment property, so there was a CGT component. That's gone (or reduced) now, buy if you planning to buy a residence by selling the unit, it is not a good move. The interest will not be tax deductible. If you are planning to buy an IP, you can probably buy two or more using the money as deposit (assuming you are good with serviceability)

........ a market now where more apartments are getting built, thus possibly creating an oversupply issue which will impact rental and capital growth?

Do you think there is more growth left in this apartment? Or are you better off selling, paying you CGT and redeploying your finances elsewhere for a better return?

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Thats exactly what I was thinking Connor. New supply will impact both capital and rental growth. However, Im seeing new 2 bedroom apartments in the area being marketed at $800K. I've heard some agents claim that the newer, more expensive units have a tendency to push up prices of existing properties. I'm not sure if this is really the case. ??

Im inclined to think that capital growth has run its course for the medium term. Whether Im better off selling will depend, as you said, on whether there are better returns available elsewhere. I guess the key is: securing a better property at the right price

If one name you could sell 50% to a spouse without duty. Gear up and then buy the new PPOR and claim the interest interest on the spouse's loan which was used to pay you out. (assuming NSW). Perhaps no CGT if always your main residence and never income producing.

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Terry, the house is in my name. I had it rented out for only a few years, CGT will be minimal

if you planning to buy a residence by selling the unit, it is not a good move.
If you are planning to buy an IP, you can probably buy two or more using the money as deposit (assuming you are good with serviceability)

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It will be an IP. I totally agree, selling it to buy a residence would be a silly move. You're pretty spot on, have serviceability to buy another 2

I've considered these costs. Stamp duty in NSW for a $650K property is approximately $25K. This will be incurred when reinvesting the proceeds of sale. Sale costs, estimate $15K. CGT: it’s a principal residence but I did have it rented out at one stage.

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Ok so not much tax. But you would still be paying $57k stamp duty to buy a 1.3m property. That and selling cost is already $72k just to change your unit into a house.

With the $72k you can instead buy an investment property and keep your current unit as well.

Thats exactly what I was thinking Connor. New supply will impact both capital and rental growth. However, Im seeing new 2 bedroom apartments in the area being marketed at $800K. I've heard some agents claim that the newer, more expensive units have a tendency to push up prices of existing properties. I'm not sure if this is really the case. ??

Im inclined to think that capital growth has run its course for the medium term. Whether Im better off selling will depend, as you said, on whether there are better returns available elsewhere. I guess the key is: securing a better property at the right price

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It all comes down to supply and demand. I'm not familiar with the area but if there's a demand for apartments in the area, and supply is limited, then more growth generally ensues.
I'm not sure on how many apartments are going to hit the market over the next few years, but that would have a bearing on capital growth.

Also, I've been in similar positions in the past where an asset has had good growth, but I feel the market my be stalling, do I hold on to it or sell and reuse the funds on better opportunities. After the usual cgt and sell/buy costs are calculated, it comes down to one question. Would you buy it again today, at current value as an investment? Look at the fundamentals, and therein will be the answer.